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Wednesday, February 01, 2012

Well, apparently to some, this woman is worth a career, a family, reputation and scrutiny of the whole of Singapore. On hindsight, it is easy to ask what is going on in the minds of those who would risk it all for a night (or a few nights) of fantasy and thrill? What the hell are those dumb and hum sup (lecherous) uncles thinking?

For those who doesn't really know what is going on, read this link first.

Well since this is after all, an investment blog, we shall leave these juicy details aside first and talk about the investment analogies here.

A company has financial statements and the ratios for analysts to pour over. Then we do more work by talking to the co. itself, its suppliers, its customers and get more info. Over time, as we look at more and more stocks, we can easily size up a firm and say: ok this is a world class firm (ie a Coca Cola), never cheap, we have to pay up. OR ok this is a bit Enron-ish, wait and see. OR this is crap (like an airline), for some value guys, it is gonna be: I will never touch it. For others, well if the price is right, I will take a punt.

Now I have alluded to that buying a stock as a value investor is like choosing a partner. Well sometimes it might be akin to choosing a prom night date. But in any case, we need to do some due diligence. Over time, most guys (hopefully) will also develop an analytical framework on girls. After looking at how she dress, how she present herself (this is the stage where analysts pour over financial statements), then after talking to her for a while (ie the talking to co./suppliers part), we can size up whether she is:

1) world class - can consider as prom date or partner
2) Enron-ish - like a Cecilia or Wendi Murdoch
3) crap - like a normal Zouk slut

The next question is how much will you pay?

In value investing, price you pay is vital, we must pay a price that is less than the intrinsic value of the firm, or else, there is no upside. For Buffett, sometimes it's ok to pay up, bcos a world-class firm's value grows over time. In fact it grows so big that even if you overpaid slightly, over time, the growth in value more than makes up. This is the power of compounding.

For cases like Enron and Crap, or the better analogy here: Cecilia and Slut, there can be no overpaying. Bcos the value of the firm declines over time. Sometimes, it might already be close to zero but the management keeps telling you there is great value in the firm. For these investments to work, we need a margin of safety. ie we only pay when the price is at a SIGNIFICANT discount to value. ie like at least a 40-50% discount if not 70-80%. Then even if we are wrong about the value, it's still ok, hopefully we won't lose too much.

So back to those hum sup lous (uncles) who paid up too much for Cecilia, what's going on? The explanation has to involve risk/reward and bet size.

In this juicy case, it's first about having a very low probability of getting found out. Most working people hear such stories from time to time, and it's probably happening often everywhere, not just in Govt and IT, but there is no way to prove in the court of law. After all, a business trip out to China, same hotel, only two parties, if all communications are non digital, there can be no trace right?

So the rationale was probably that there is some "perceived" value (her looks probably can fight Fann Wong's), and there is this risk of overbetting/overpaying a lot but the probability of failure/getting caught is quite low. Something akin to picking up pennies on the rail track in investing (buy something for an almost guaranteed 3% return but if things go wrong, -50%, half your money gone). Things are ok until the train comes and you are still catapulting your Angry bird to hit some pig on the iPad, oblivious...

Another case of Wendi Murdoch is also quite interesting. For her full story, just look up Wikipedia. In short she is like Cecilia x 100. Why did Rupert Murdoch, one of the richest men in UK marry this bitch I mean brave woman, knowing fully she spreaded her legs for every promotion up the scale of quality life?

For Murdoch, it's the bet size - he kept it inconsequential. It's something he can afford to lose (like some part of his media empire) and he doesn't care. He just wants to enjoy life while he still can. This is akin to an investor putting pocket money (like 1-2% of his whole portfolio) into some alternative products. If it doesn't work, it is not going to be a big deal. But with buying these products probably come other benefits like alternative research, network, avenue to bounce off ideas etc.

And for Murdoch, Wendi did save him from a tray of shaving cream, yeah that's return of capital already! But for Cecilia's hum sup lous, alas, the worse case black swan apocalypse just happened. Well hope they had had their fantasies come true at the hotel already!

As for lessons learnt for value investing: stick to the world class great co.s, buy them at reasonable prices, they rarely come cheap.

If you are in the mood for some Cecilia and sluts, oops, I mean some less-than-perfect co.s, my advice is don't. Ok... that's not something you will want to heed, then the 2nd best advice is this: make sure you have a good margin of safety and size the bets correctly.

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